Friday, September 23, 2011

Tapping the Potential of Sustainable Energy in Indonesia

Arian Ardie has been involved in some of Indonesia’s biggest projects, from the Tangguh Liquified Natural Gas Project in West papua to Asia Pulp and Paper, to the Aceh Reconstruction Consortium. Recently he established the US Embassy’s At America Center — a multi-media information forum at Pacific Place, Jakarta — before returning to the energy sector, this time as a Director of Terrasys Energy, which strives to build mini hydro-electric plants across Indonesia. Ardie also remains active at Jakarta’s American Chamber of Commerce, or Amcham. Recently Ardie talked to the Indonesia Network about Terrasys’s projects, the future of hydro-electric power, and the potential of sustainable energy in Indonesia.

Indonesia Network (IN): What are Terrasys’s plans for hydro-energy?

Arian Ardie (AA): Well, we are developing hydro-electric projects, specificially run of the river projects. which means that they don’t have a large dam, and hence have significantly lower environmental impact. Indonesia has huge hydro electric potential, but we now use only 15 per cent of our total potential. Hydro-electric power makes less than 3 per cent of the total power mix.

We have a pipeline of projects that we are developing. Our first ones going online are two small projects in Bali, each will be producing 1.5 megawatts of energy. We are also working on a project in Papua, which will produce 3 megawatts. And we have a large project in Sulawesi that will produce 100 megawatts. We have other projects in development in Sumatra and Bali, but for various reasons, they have taken a backseat for now.

IN: So only 4.5 per cent of Indonesia’s energy sources is from renewable energy. But the country’s target is for renewable to make up 17 per cent of the total mix. Can we achieve this target?

AA: The focus has been on developing larger projects to meet Indonesia’s energy needs. Alternative and renewable energy projects tend to be smaller in scale than the 10,000 megawatt projects that have been on the fast track. And until about two years ago, the regulations coming out of (national electricity company) PLN were not favorable towards the development of independent projects, specifically renewable energy projects.

IN: Why were the regulations not favorable for alternative energy projects?

AA: Alternative energy was not a priority for the government and most of the focus was on large coal projects, or large hydro-carbon projects. That has traditionally been most of the energy mix. The overall capital development costs were also lower on those projects, although the per annum operation costs are much higher. Typically one megawatt of a coal power plant will cost USD $1 million to develop. Hydro-electricity needs USD $1.5 million per megawatt. Wind energy would cost USD $2 million to develop. Photo-voltaic Solar energy would cost USD $2 million. But once these systems are established, the overall operation and maintenance costs, as a percentage of overall revenue, are very low.

IN: Is the government more aware now of the benefits of alternative energy?

AA: Yes. The Indonesian government and PLN have put positive initiatives in place. Now, renewable energy projects can be developed without a tender. And for projects that will produce less than 10 megawatts, there is a standardized price of rp. 656 per kilowatt hour multiplied by a regional multiplier. Which means that for Sumatra, that rate is multiplied by 1.2. In Kalimantan, the rate would be multiplied by 1.3. In the Eastern islands, the regional multiplier is 1.5.

Also, there is now a standardized PPA (Power Purchasing Agreement) which takes out uncertainty in the pricing.

IN: Are local investors taking part in these projects?

AA: Yes, very much so. But until a few years ago, we had a problem with a negative investment list. Back then, projects smaller than 10 megawatts were reserved for small and medium enterprises. The problem with that was, as soon as you make an investment in renewable energy, your company is no longer considered a small and medium enterprise. Because you need a million and a half dollars to build just one megawatt power plant. And the cut off for being a small and medium enterprise was 1 million dollars of investment. So in effect, the regulation kept anyone from legally investing in a power plant less than 10 megawatts in size. So, in the last revision of the negative investment list last year, this regulation was taken out.

Since then, there has been a significant rush to develop renewable energy, specifically hydro-electricity. And the players have been primarily local players.

IN: Does hydro-power required complicated technology?

AA: No. The turbines that are used were invented 100 years ago. There have been some developments, but the basic turbines were invented in the late 19th centruy. There are hydro turbines in continuous use in Norway that have been used for almost 100 years. Here in Indonesia, one was commisioned in the 1930s, but we only retooled it and put it into commission about a year and a half ago.

IN: The government wants alternative energy to make up 17 per cent target of the total energy mix. Can we achieve this target?

AA: No.

IN: Why?

AA: The main issue are the subsidized electricity rates. Until essentially market prices are allowed to be achieved, there are still strong disincentives for investment in other types of renewable energy. Ironically, Indonesia still subsidizes hydro-carbon based power production. Approximately 25 to 30 per cent of Indonesia’s energy is still generated by diesel, and a good 40 per cent of that generation is on the Java Bali grid. So essentially the government is double subsidizing the pricing. Which means that it is very expensive for the Indonesian government. Power subsidies for diesel-generated electricity can be as high as 14 – 15 cents per kilowatt hour. Which is higher than the best price that they are giving for renewable energy production.

IN: What is the government’s explanation for these policies?

AA: That it is a regulation! Someone said that there must be a good reason for the government to have made that regulation, so the regulation must be followed!

IN: Are hydro-electric power plants still a good investment?

AA: Yes. It is a long-term investment. Not the kind of investment that gives immediate payback. The investment payback for hydro projects is in approximately 5 to 7 years, and the project will continue to pay for 25 years after. And it would be a stable return. So once these projects come online, international investment funds love these kinds of investment. Because they are low-risk, have a good rate of return, and have a longer shelf life.

Which is somewhat ironic bc there is a higher risk of investment on the front end. But once it starts operating, the risk tapers off significantly. As opposed to a coal-powered plant, where the future risk is high, because you’re subject to fluctutating prices.

IN: You have worked on many sustainable development initiatives. Can sustainable development projects like this be replicated in Indonesia?

AA: Yes. A sustainable development initiative that puts equal weight to development, environment, and social impact, can happen in Indonesia. You can put together a project that has low environmental impact and has greater social benefits in term of employment than they do negative impacts, and are still economically viable. In practice, you can. What these initiatives require is a different kind of risk taker. And the funding for these type of risk takers. Traditionally, investors in Indonesia — primarily domestic investors — have gone after government-guaranteed projects. Large scale projects, where they know the benefits they are going to receive will be guaranteed by the government. This holds true whether they oil and gas projects, or coal-powered plants.

The scale of sustainable projects are generally lower, and the initial risk is higher because there has not been a proven track record. That makes the projects less likely to be financed by an Indonesian financial insitution which may not understand the energy aspect of the project, or the technology. Or it may not be financed by a foreign institution which sees these projects as too small in scale. But as Indonesian banks start to understand the investment and how to appropriately underwrite it, there will be more and more funding available.

IN: Has there been this shift in outlook amongst the banks?

AA: Yes. Not fully yet, but Indonesian banks are funding these kinds of projects. Bank Mandiri has been very active. Bank Permata has been very active. Bank Muamalat has been active.

IN: Have they been active without prompting from the President?

AA: Yes.

IN: What would be the bottlenecks for these projects?

AA: One would be the bankability gap. What that means is the diffference between having a good idea for a project, and the ability to take that good idea to the stage where it is bankable, where you can get a negotiated power purchasing agreement. And that gap is approximately half a million to a million dollars, in feasibility studies, in operation overhead, in pre-construction engineering work, in environmental impact assessment, in water and land rights.

That’s where the main risk comes in. You have to put in a million dollars prior to knowing that you can get the contract. And for medium size investors, that’s a significant risk. There is no early stage venture capital market that has been effectively willing to support that bankability gap.

IN: Isn’t Mekar building a platform for angel investors?

AA: Yes but it is going to take a while for angel investing to develop as an industry. But we have hit the limit for financing from friends and family, which is how a lot of enterpreneurs received financing. Enterpreneurs now have to hit more formal avenues of financing.

To find out more about Terrasys and Indonesia’s potential for hydro-electric power, check out www.terrasysenergy.com.